Growing Economy Means Falling Inequality, Right? Think Again.

If a nation’s GDP is growing then its citizens are getting wealthier, right?

Well, not exactly. The theory goes, if a country’s GDP is growing, then the country’s wealth is increasing, and so all its citizens are becoming wealthier. Since GDP first appeared in the 1930’s this has been the mantra religiously followed by economists and policymakers who believe that GDP growth will improve the lives of everyone.

History has proved this not to be the case. First, we need to take a step back. GDP has been criticised as a measure of ‘wealth’ for as long as it has existed. Its first critic, believe it or not, was the man who invented it, Simon Kuznets. He warned in his initial report to US Congress in 1934 that GDP was not to be used as a measure of welfare, later clarifying ‘distinctions must be kept in mind between quantity and quality of growth…Goals for more growth should specify more growth of what and for what’. Despite this warning GDP quickly became adopted globally as a country’s primary measure of its economy.

Since then, human welfare has played second fiddle to output produced. Fast forward to the present day and we can see the results of this mistake. Instead of incomes of all citizens rising together as GDP increases, incomes of the highest earners have increased disproportionately to lower income groups. The World Inequality Report was created with the intention of measuring this inequality and showcasing the disparity of wealth around the world.

Let’s take a look. The 2018 Report shows that the US has grown more unequal, with its top 1% almost doubling their share of national income to over 20% since 1980, while its bottom 50% have lost half their share, down to just 13%. The UK’s results do not provide much better reading with their top 1% now earning 14% of national income, up from 6% in 1980. The story is much the same throughout all developed countries, with the top earners increasing their share of national income while the lower groups have seen their share fall.

When our attention moves towards those nations perceived as moving from developing to developed status we immediately see the scale of the problem. In China the top 1% has doubled their share of national income. India has seen its top 0.1% increase their share more than the bottom 50% in the same time period. The Middle East as a whole sees its top 10%hold over 60% of GDP growth while the bottom 50% hovers below 10% of the area’s income. This is echoed in Brazil and South Africa. For many developing nations in places like Africa and Latin America data has been harder to find. Initial surveys have suggested that the problem is even worse here, and this is not difficult to believe looking at the data available.

Why is this the case?

GDP focuses its attention on goods and services produced. These can be goods like cars or computers, or services such as insurance and law advice. When a manufacturer or service provider makes more profit, this increases their contribution towards GDP. So who sees the profit? Is it the employees who work for the company? The unemployed who are unable to find work? Or the shareholders, board of directors and executives at the top? I don’t think I need to answer that for you.

These are big warning signs for developing nations. Where inequality is already rife, policies that encourage pursuit of GDP will only exacerbate the problem in the future. However, there is hope. The flaws of GDP have been noticed. High profile figures such as IMF head Christine Lagarde and Nobel Prize winning Economist Joseph Stiglitz have publicly criticised its use in recent years. Many are championing a move away from GDP to a measure that includes factors like inequality, welfare and human wellbeing. Examples of these include the Human Development Index and Happy Planet Index, amongst others. These indexes prioritise quality of life ahead of areas like national output and monetary gain.

Developing nations have the opportunity to lead this change by pursing new measures and building economies upon the success of their people, not the success of their industries. With the mistakes of others laid out before them, we could see these countries become places of higher wellbeing and quality of life than the ‘developed’ nations that have blindly pursued GDP growth above all else.

Until welfare of a population becomes the primary objective of a nation’s government, however, it can come as no surprise when we see increasing GDP drag increasing inequality along with it.

About the author

Alex Baker is a researcher at WMC covering areas relating to climate change and economic development. He is an Economics Graduate currently working and travelling throughout Europe and Asia.

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